As a small business owner, have you ever caught yourself saying something like this?
“I have no idea what’s going to happen next week, let alone in six months time - how can I budget for what I don’t know?”
“My accountant wrote one for me six months ago. I think it ended up in a folder somewhere.”
“I don’t need a budget to tell me when I’m making money!”
“As soon as a budget is written, something will change and it’s out of date”
These are all reasons we’ve heard from business owners as to why they think they don’t need a budget.
The reasons almost sound valid, after all - the future is unknown, but they are certainly all WRONG.
The reality is, budgets are not about crystal ball gazing.
You don’t budget to predict the future, and you don’t budget to be “right”.
You budget to give yourself a direction and some chance of influencing your financial fate.
In essence, a budget is simply a financial description of your business plan.
And as the saying goes, “failing to plan is planning to fail”.
Why Bother with a Budget when Growing A Small Business
So what exactly is the purpose of a budget?
A decent budget will serve four or five very useful functions for your business:
- A budget is a performance benchmark. Having clear performance benchmarks is especially important for businesses that fluctuate due to seasonal or project undulations. Without a budget, how do you know if you are on-track or off-track? What is your early warning signal to indicate a need to change plans?
- A budget is a financial control tool – it helps to monitor and control expenditure and give early warning signals if expenses are creeping higher than you would like
- A budget is a decision making tool. Budgets allow you to model decisions – what if we added a staff member? What would need to change to allow us to afford a new vehicle? What happens if we lose this contract?
- A budget can be an accountability and delegation tool – it’s often used as a way to delegate partial or full responsibility to staff for income and / or expenditure goals. A General Manager will usually be delegated a budget to achieve, and will be explicitly measured against it, and
- A budget is a continuous improvement tool – reviewing a budget leads to questions such as what was different and why? What can we learn? What should we do differently? Even a budget plan that turns out to be wildly off-the-mark when the year has passed, will yield powerful lessons and insights when critically reviewed.
It's worthwhile pointing out that a budget is not a forecast.
It’s not something to be continually changed as the world changes around us.
Whilst a forecast, which is about looking at what we think is going to happen, is very important (sometimes critically so), it will serve a different purpose to a budget (which represents our business plan).
Simply overriding a budget (our plan), with a forecast (what’s currently happening) every time something changes means we miss the opportunity to understand and learn more about why our business planning didn’t match the real world – for better or worse.
The more we test and understand our plans against the reality of the results we are getting, the better we get at running a business in a volatile world.
My experience is that most small businesses don’t have a budget or a rigorous budgeting process, and most large businesses do.
Draw your own conclusions on what you should do if you want your small business to be a bigger business.
8 Tips to Better Small Business Budgeting
I’m now sharing eight lessons I’ve learned on the most useful budgeting tools and practices for small business:
- The best budgets will be based on accounting performance (through Profit and Loss accounts) as well as give you a clear and simple picture on your expected cash position at each point in the journey. After all, cash is the business’ oxygen, so it’s good to know if you’re running low!
- A good budget should represent your business plan. Used properly, a budget is much more than a set of arbitrary numbers on a page. It explicitly links your financial numbers to your actions. If you need to undertake marketing in March there should be marketing expenses factored in for March. If you plan for sales to slow after Easter, your budget should show that together with any changes in expenditure that might result. The best budgeting processes start with a clear story about a business strategy and plan, and end up as a clear and compelling financial narrative of that plan. Conversely you should make sure that any numbers in your budget are backed up by realistic actions. If you want sales to increase 15% then how will you make that happen? Who is responsible for it? What skills, tools or resources do they need? What else needs to change to see 15% happen? The numbers and your business plan need to tell the same story
- The best budgets also consider capital investment linked to operational and strategic goals. A superb budget goes one step further and recognises the impact of your strategic initiatives. The budget numbers factor in some investment in a strategic project and then some resulting changes to income or expenditure brought about by implementing some projects to improve your business. This could be factoring in more sales due to a marketing plan starting to work, reducing costs due to purchasing more efficient equipment or seeing margins increase through better pricing processes
- The best budgets are built around the inputs and activities that create revenue. This can be as simple as looking at the number of customers multiplied by an average spend. Or it could be a measure of your expected team productivity. Whatever it is that drives your business performance should form the basis of your plan and therefore your budget
- A good budget will make sensible “best guess” assumptions about things you can’t control (eg. unable to work because of bad weather) and optimistic assumptions about the things you can control (eg. an average upsell improvement of $8 per customer based on our new product lines). You don’t have to assume the best case in everything but there is no point budgeting for everything that could go wrong. You want to benchmark yourself against your plans and a decent balance between inevitable potholes, as well as a few nice surprises. You should have some efforts underway to improve your business from one year to the next, that allow you to factor in some measurable upside. And whilst you don’t know exactly when that new sale will come off, you do know the average lead times from previous years and can base the estimate on a realistic target
- The best budgets are developed with a wide range of input from the team, suppliers and customers and can be a powerful tool to retest your strategic plan. After all, the true “story” of the business year will be determined by the decisions and efforts of many people, so it makes sense to get their input before writing your budget
- Budgets can be changed part way through a year if major things change – but do so with caution. Don’t just lower the bar because things aren’t working. As mentioned, budgets are not meant to be a forecast but instead represent your plan. So if you have to completely overhaul your business plan part way through the year then it may be appropriate to rework your budget, as you you learn some important lessons along the way, and
- A budget is only useful if it is reviewed regularly, and compared to actuals. Monthly is often a useful cadence but sometimes weekly or quarterly can be appropriate. If the budget review is not a scheduled business activity, you can forget any benefits from having done one in the first place.
Whilst the above list represents best practice, simply getting some reasonable estimates in place and having the discipline of reviewing your progress against them each month will start to give you insights into what is and isn’t working in your business plan after just a few months.
Not having a budget is usually an indication of not being serious about running your business.
If you don’t have a budget, and you want your business to be better, it’s time to get serious.
If you would like some further direction and support to understand how to make use of budgeting to help grow your business, I suggest you start by joining our Community, and asking our Growth Leaders and other Community Members for someone who might be able to help with what you need.
We hold two webinars a month:
- A Mastermind, where an expert goes deep on a topic (eg. recruitment), and
- A Group Coaching session - small business owners in the Community put forward their business issues and growth challenges, and Michael, Troy and I (and the other Community members) chime in with how we would tackle those problems.